The Economy Of Analysis - Part 8

In previous parts I have argued that the slow down in the global economy is not a consequence of some “Crisis of Capitalism”, but is a consequence of political decisions.

In China, India and elsewhere the slow down is being deliberately engineered by Governments, via higher interest rates and other credit measures, because these economies are growing at such a rapid pace, that they risk overheating the economy. In the US, the slow down is also a consequence of political decisions being taken at a state level, as opposed to the policies of fiscal stimulus adopted by the Federal Government.

In the aftermath of the mid-term elections, and the election of some Tea Party supporters, who are pressuring the Republicans from the Right, there is also a limitation on the possibility of further fiscal stimulus even at the Federal level, leaving most of the tools in the hands of the Federal Reserve. The effectiveness of its Monetary Policy is now limited by previous easings, and by the need for it to be combined with fiscal expansion. In the UK, the Tories had set their stall out for the 2010 elections on the basis of the need for austerity, as a means of distinguishing themselves from Labour and the Liberals, and as a means of securing the votes of their core supporters. Having established that narrative in the most strident and extreme terms, ridiculously comparing the UK's position with that of Greece, they were locked into following through on its implications, because any reversal, early on, would have played badly in the markets as well as with their supporters.

The Liberals, who David Laws has told us, were opposing the Cuts even during the Coalition negotiations, and who recognised the talk about the deficit as being “hyped up”, were prepared to drop that position, in the same way they were prepared to drop their other policies, and pledges, such as that to oppose any further rise in Tuition Fees, in order to get their hands on Ministerial Limousines, and the other trappings of Government. In Europe, politicians from Conservative Parties in Northern Europe, have led calls for austerity in the peripheral economies, because this plays better with their electorates than openly setting out the need for large scale transfers from Northern to Southern Europe, and for more deep seated reforms of Europe, such as the establishment of a United States of Europe.

But, there are other reasons that policies of austerity are being proposed, which also have nothing to do with being simply a reflection of the interests and needs of Capital.

When the Long Wave Boom came to an end in 1974, and the developed economies sank into a prolonged series of recessions, and slow growth that extended into the 1990's, Governments first responded by introducing Keynesian stimulus, in the same way they had done during every previous recession during the Long Wave Boom from 1949 onwards. Were these Keynesian policies introduced under direct instruction from Capital? Did these policies directly reflect the needs and interests of Capital?

No, they represented economic and ideological orthodoxy of the time, an orthodoxy that had become powerful, because it seemed to have worked so well during the whole of the post-war period, and played into the social-democratic consensus of full employment, and the potential for a crisis-free Capitalism. But, not only were these policies NOT in the interests of Capital, at that time, but they were shown to be so by the fact that they simply did not work. After some initial, short term success, economies once again sank back into recession, but now with the added complication of increasing rates of inflation. Despite the fact that these policies were not working, it took the best part of a decade for the orthodoxy to be overthrown, and for new economic policies to be adopted.

Yet, much of the Left analysis tends to portray the idea that whatever policies Governments adopt, are immediately those needed by Capital. It presents a view in which Capital is essentially omnipotent. If then these policies do not work, it is because there are no viable solutions for Capital at that point. This view, of course, fits well into that “catastrophist” view, in which Capitalism has to be seen as a system in constant crisis, always on the edge of the final collapse.

This contrasts with Marx's approach. He saw that crises could quite easily arise as a result of mistakes by policy makers, and that, therefore, these policies were in no way immediately determined by the needs and interests of Capital. Take for example, his analysis in Capital of the role of the 1844 Bank Act in the crises of 1847, and 1857. He writes,

“But in reality the separation of the Bank into two independent departments deprived its management of the possibility of freely utilising its entire available means at critical times, so that situations could arise in which the banking department might be on the verge of bankruptcy while the issue department still had intact several millions in gold and, in addition, its entire 14 million in securities. And this could take place so much more easily since there is a period in almost every crisis when heavy exports of gold take place which must be covered in the main by the metal reserve of the bank. But for every five pounds in gold which then go abroad, the domestic circulation is deprived of a five-pound note, so that the quantity of circulating medium is reduced precisely at a time when the largest quantity is most needed.

The Bank Act of 1844 thus directly induces the entire commercial world forthwith to hoard a reserve fund of bank-notes at the outbreak of a crisis; in other words, to accelerate and intensify the crisis. By such artificial intensification of demand for money accommodation, that is, for means of payment at the decisive moment, and the simultaneous restriction of the supply the Bank Act drives the rate of interest to a hitherto unknown height during a crisis. Hence, instead of eliminating crises, the Act, on the contrary, intensifies them to a point where either the entire industrial world must go to pieces, or else the Bank Act. Both on October 25, 1847, and on November 12, 1857, the crisis reached such a point; the government then lifted the restriction for the Bank in issuing notes by suspending the Act of 1844, and this sufficed in both cases to overcome the crisis. In 1847, the assurance that bank-notes would again be issued for first-class securities sufficed to bring to light the £4 to £5 million of hoarded notes and put them back into circulation; in 1857, the issue of notes exceeding the legal amount reached almost one million, but this lasted only for a very short time.”

Capital III, Chapter 34.

The 1844 Bank Act was based on the incorrect theoretical position developed by Ricardo in relation to Gold and Money, as analysed by Marx in the Contribution To A Critique of Political Economy.

It had been lobbied for by supporters of the Currency School, and by the Bank of England Governor, Lord Overstone. It demonstrates that each particular crisis has to be analysed concretely within its own terms, and not simply attributed to some all pervasive, crisis of Capitalism.

If we take the situation in 1974, for example, it is more correct to say that Keynesianism did not and could not work, because there was no immediate solution to the crisis, than it is to make that argument today. In order to understand why that is so, its necessary to understand the different nature of crises within different conjunctures.

In the article in the Weekly Worker, for example, Hillel Ticktin, argues against those, like Andrew Kliman, who see the basis of the crisis as residing in the Falling Rate of Profit. Ticktin, in contrast argues that the crisis is a result of a Surplus of Capital. But, both are wrong viewed in the terms that they are presented.

There is no reason why a Falling Rate of Profit should result in a crisis. As Marx points out, although there is a physical limit below which wages cannot fall, without reducing the supply of Labour Power, there is no such minimum level for profits. He should, however, have gone on to add that there is a level below which Capitalists will tend to switch their expenditure away from productive and towards unproductive expenditure, towards purchase of luxury goods, towards speculation etc. But, this level cannot be objectively determined a priori. In fact, to the extent that they do switch their expenditure away from productive investment, the real basis of a crisis, as a crisis of overproduction of Capital, is undermined, precisely because a lower level of production of Capital results. But, Ticktin's argument in relation to a Surplus of Capital as the basis of some current crisis of Capitalism is not right either. Ticktin sees this Surplus of Capital as reflected in the build up of Money Capital in various funds around the globe.

Now, of course, he is absolutely right to see that there is indeed this build up of Money Capital, and I have pointed to it myself. But, Ticktin does not enquire any further into the nature of these Money hoardes, content to simply see them as a Surplus of Capital. But, when Marxists talk of a Surplus of Capital, or of an overproduction of Capital, they have something more specific in mind. When Marx, described such crises of overproduction, in the 19th century, he was not describing a situation, in which there was some absolute overproduction. In fact, a crisis of overproduction usually exists within the midst of generalised want! It is not that more commodities have been produced than could be usefully consumed, nor even that more Capital has been produced than could be put to work. For a Marxist, a crisis of overproduction is one in which more has been produced than can be sold at a profit, or at a sufficient profit to facilitate continued reproduction.

In Capital he says,

"Over-production of capital, not of individual commodities — although over-production of capital always includes over-production of commodities — is therefore simply over-accumulation of capital...

There would be absolute over-production of capital as soon as additional capital for purposes of capitalist production = 0. The purpose of capitalist production, however, is self-expansion of capital, i.e., appropriation of surplus-labour, production of surplus-value, of profit. As soon as capital would, therefore, have grown in such a ratio to the labouring population that neither the absolute working-time supplied by this population, nor the relative surplus working-time, could be expanded any further (this last would not be feasible at any rate in the case when the demand for labour were so strong that there were a tendency for wages to rise); at a point, therefore, when the increased capital produced just as much, or even less, surplus-value than it did before its increase, there would be absolute over-production of capital; i.e., the increased capital C + ΔC would produce no more, or even less, profit than capital C before its expansion by ΔC.

In both cases there would be a steep and sudden fall in the general rate of profit, but this time due to a change in the composition of capital not caused by the development of the productive forces, but rather by a rise in the money-value of the variable capital (because of increased wages) and the corresponding reduction in the proportion of surplus-labour to necessary labour....

However, even under the extreme conditions assumed by us this absolute over-production of capital is not absolute over-production, not absolute over-production of means of production. It is over-production of means of production only in so far as the latter serve as capital, and consequently include a self-expansion of value, must produce an additional value in proportion to the increased mass.

Yet it would still be over-production, because capital would be unable to exploit labour to the degree required by a "sound", "normal" development of the process of capitalist production, to a degree which would at least increase the mass of profit along with the growing mass of the employed capital; to a degree which would, therefore, prevent the rate of profit from falling as much as the capital grows, or even more rapidly.

Over-production of capital is never anything more than over-production of means of production — of means of labour and necessities of life — which may serve as capital, i.e., may serve to exploit labour at a given degree of exploitation; a fall in the intensity of exploitation below a certain point, however, calls forth disturbances, and stoppages in the capitalist production process, crises, and destruction of capital.

It is no contradiction that this over-production of capital is accompanied by more or less considerable relative over-population. The circumstances which increased the productiveness of labour, augmented the mass of produced commodities, expanded markets, accelerated accumulation of capital both in terms of its mass and its value, and lowered the rate of profit — these same circumstances have also created, and continuously create, a relative overpopulation, an over-population of labourers not employed by the surplus-capital owing to the low degree of exploitation at which alone they could be employed, or at least owing to the low rate of profit which they would yield at the given degree of exploitation."

Capital III, Chapter 15

Marx distinguishes between this situation, which can be manifest as a partial crisis, and those which are generalised.

Partial crises of overproduction occur all the time. The image portrayed by orthodox economics of a market economy in which demand and supply are automatically matched, is, of course, a fiction. Precisely, because Capitalism is an unplanned system, whereby production takes place on a speculative basis, with the hope by the producer of finding a market, it is continually the case that commodities are produced for which there is no demand e.g. the Sinclair C5. Even, where demand exists, it is frequently the case that Supply either exceeds or fails to meet the Demand. In 2000, CISCO wasted billions of dollars worth of resources, producing electronic switching gear for telecommunications that became essentially useless, as the Tech Crash, collapsed demand for such networks.

Every week, supermarkets throw vast amounts of food into skips, that they have not sold, and so on. This overproduction, does not lead to a generalised crisis in most cases, because the losses are absorbed by the particular firm, or else, even if that firm goes bust, the losses are then absorbed by its suppliers, who fail to get paid. A generalised crisis only arises where a large enough number of firms find that they cannot sell their output profitably, where the losses they make cannot be absorbed, and where this results in Capital being destroyed, workers are laid off, and so on.

Is that the situation we find ourselves in today? No, it clearly is not. What has been noticeable in the last year or so, is that many firms, even in the US, and Europe, have continued to report increasing profits. In fact, what Ticktin seems to fail to recognise is that one of the reasons that such large hoardes of Money exist around the globe, is precisely because companies HAVE been making such large profits. Now, you can hardly argue that there is Surplus Capital, in the traditional Marxist sense of that term, when such large profits are in fact being made from productive activity around the globe!

There is a difference between a crisis of overproduction where commodities cannot be sold at a profit, and a situation where exceedingly high levels of profitability leads to a situation where Money Capital simply cannot be invested quick enough, or where the owners of Money Capital hold back from further investments due to concerns about prospects for the immediate future. It is the latter condition, which characterises the current situation. After all, the owners of that Money Capital can hardly be accused of engaging in financial speculation instead with that Money, when they are being offered the grand sum of 1.9% interest for investing in US 10 Year Treasury Bills!

This situation is not the same as that faced by Capital in 1974, when there was a generalised overproduction of Capital, when that had led to a low rate of profit, and where there was a shortage of investment opportunities for Capital to be able to make higher returns. That is essentially the reason that Keynesian measures to stimulate demand, raise confidence levels, and thereby restart growth could not work in that period, and why in the current period they can. That comes down to the different conditions that exist within the Long Wave Boom. It is to that I will turn in Part 9.

Back To Part 7

Forward To Part 9